Private credit sector shows signs of resilience amid rising structural risks and investor anxiety

The private credit market has shown tentative signs of easing but remains under pressure from investor sentiment that some market participants say outstrips underlying performance.

According to Fitch Ratings, the U.S. private credit default rate for the 12 months through February fell to 5.4 percent from 5.8 percent in the 12 months through January, with seven defaults recorded in February spanning health care providers, health care devices, technology software, building and materials, chemicals and business services. Fitch’s broader monitoring of the sector also showed a much larger wave of distress in 2025, when defaults among private-credit borrowers rose to a record 9.2 percent, driven largely by smaller issuers with revenues near $25 million, the agency reported. That 2025 tally identified 38 defaults across 28 borrowers and highlighted the vulnerability of compact capital structures to higher floating rates, even though software companies, despite recent equity turbulence, recorded no defaults in 2025. According to other Fitch reporting, defaults hit 5.8 percent for the 12 months ending January 2026, the highest since August 2024, with health care prominent among recent defaulters.

Yet market sentiment has pushed publicly traded private credit managers sharply lower. Shares of listed private credit management funds have dropped between about 25 percent and 35 percent since September 2025, reflecting investor fears of contagion and wider financial strain. “Sentiment has dramatically amplified the underlying narrative,” Nadeem Kassam, chief investment strategist and chief operating officer at Marnoa Private Wealth Counsel Ltd., told The Epoch Times. Kassam argues that some of the panic is misplaced because exposure to AI and software among private credit portfolios is modest, roughly 6 percent of assets, and that software-linked loans and bonds have moved only modestly compared with a much steeper decline in software equities.

Large-bank and asset-manager analysis largely supports the view that recent price moves have been driven more by perception than by broad loan deterioration. J.P. Morgan Private Bank’s analysis finds non-accruals among publicly traded business development companies remain relatively low at about 2 percent, suggesting that recent defaults have tended to be isolated. The report notes BDC valuations are compressed, trading on average at roughly a 17 percent discount to net asset value, near lows last seen in June 2022, while alternative asset managers trade at about 18 times fee income, a multiple the bank says has in past cycles troughed in the mid-teens.

Institutionalisation and scale within private credit provide further context. The prospectus for BlackRock’s HPS Corporate Lending Fund, produced after BlackRock’s acquisition of HPS Investment Partners, underlines a substantial integrated platform spanning senior and junior credit, asset-based finance and private placements, illustrating how private credit is increasingly run like a mainstream asset class. At the same time, J.P. Morgan’s broader work cautions that while private credit has grown rapidly, it still represents a limited share of total corporate borrowing and, in their view, is unlikely by itself to create systemic turmoil.

But structural risks persist. BDCs typically offer lower interest-coverage cushions than large public borrowers, their EBITDA-to-interest ratios are narrower, implying a smaller margin for error if earnings slip or funding costs remain elevated. Market participants warn that limited liquidity, opaque valuations and the potential for redemption strains amplify the concern. “The sentiment shift is real in that investors are suddenly focusing on opaque valuations, limited liquidity, and redemption caps. More amazingly, it is not appearing out of nowhere. It is being triggered by underlying stresses and jitteriness regarding forecasted underlying stress: weaker borrowers, tighter exit markets, higher-for-longer financing costs, and sector-specific problems, especially in software,” Thomas Young, economist and partner at Econometric Studios, LLC, told The Epoch Times.

Practical signs of tightening are emerging beyond equity prices. JPMorgan Chase has taken markdowns on certain loans linked to private credit funds, particularly those extended to software firms, reflecting heightened caution among bank lenders that finance private credit platforms. Those reassessments, and the possibility of simultaneous draws on available bank commitments, are cited as tail risks; Moody’s has estimated roughly $340 billion of unused bank commitments available to private credit borrowers, a resource that could be stressed in a broad downturn. Kassam notes these bank facilities are typically secured and senior, but says a deep, prolonged recession would be required for widespread actual losses to materialise.

Investors and managers describe the current phase as an adjustment to tighter conditions rather than a collapse. “The market is going back to basics, with cash flow and structure in the spotlight again. We know private markets tend to adjust later because there is less visibility. But when things start to move, they also move quickly,” Arthur Azizov, founder and investor at B2 Ventures, told The Epoch Times. He and others point out that the private-credit expansion followed an extended era of plentiful liquidity and ready refinancing, assumptions now being tested.

In sum, the evidence is mixed. Default metrics have moved down in the most recent month even after a difficult 2025, and metrics such as non-accrual rates for listed BDCs remain modest. However, tighter lender scrutiny, markdowns on software-linked loans, compressed valuations and structural features, smaller interest-coverage cushions and concentrated exposure among smaller issuers, mean the sector is more sensitive to a deterioration in economic conditions or an erosion of liquidity. Market participants and official watchers will be watching borrower cashflows, bank commitment utilisation and any further signs that markdowns among lenders are contagious across the private-credit ecosystem.